Self-employment vs hobby income

Question

I've been filing my freelance computer programming income as self-employment for the past 18 years (and it was my only source of income until 2019), but I'm now retired (72), living off Social Security benefits, and my programming work is only bringing in $2-3K a year. Would I be better off filing my programming income as hobby/other income to skirt the 15% self-employment tax, and would that be legal? My social security income is $27K before Medicare deductions.

CMayo · Answer

Thanks for such a comprehensive reply! At this point, I'm only involved out of loyalty to a client who's kept me working for the past 18 years, and because I still enjoy coding. I don't promote the service, I don't keep records (but have never done either), the project's finished, we're no longer adding features, and I'm only dealing with the occasional bug here and there when the client calls, but since the same work has been established as self-employment for so long, I think I'd better call in and let the IRS make the call. Thanks again, I hope your comments can help someone else, too!

Austyn · Answer

Hello CMayo,

You generally cannot simply reclassify self-employment income as hobby income to avoid self-employment tax. The IRS determines whether an activity is a business or a hobby based on factors such as whether there is a profit motive, how the activity is conducted, and the history of the activity.

In situations where an activity has been carried on for many years as a primary source of livelihood, continues in a similar manner, and is operated in a businesslike way, it is more likely to be considered a business rather than a hobby.

It’s important to note:

- Hobby income is still taxable and reported as “Other income” on Schedule 1.

- Since 2018, hobby expenses are no longer deductible, meaning you cannot offset hobby income with related costs.

- Business income reported on Schedule C allows you to deduct ordinary and necessary expenses, which can reduce your net self-employment income.

If you are considering whether an activity has shifted from a business to a hobby, you might consider:

- Whether you are still marketing your services or maintaining business records.

- Whether you have deductible expenses that could reduce your net self-employment income below the filing threshold for self-employment tax.

- Whether the activity is now primarily for personal enjoyment rather than profit.

This determination is fact-specific and depends on the overall circumstances, not just the amount of income earned.

The following links can provide additional information on business vs. Hobby income:

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https://www.irs.gov/newsroom/heres-how-to-tell-the-difference-between-a-hobby-and-a-business-for-tax-purposes

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https://community.freetaxusa.com/kb/articles/115-do-i-have-a-business-or-a-hobby